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Brazil's state-owned Petroleo Brasileiro SA, or Petrobras, announced last week that it was raising domestic gasoline prices 6.6% effective Jan. 30 -- a move that makes sugar-based ethanol fuel more attractive than gasoline at the pump. In Brazil, more than half the vehicles can run both on gasoline and 100% ethanol fuel.

The nation also is stirring demand by raising the ethanol content of its gasoline to 25% from 20% in May, an announcement that came a day after the price hike.

The developments -- plus an increase in U.S. requirements for ethanol in auto fuel -- mean greater demand for Brazilian ethanol, which uses sugar cane as a feedstock. As more cane goes to produce ethanol rather than raw sugar, prices of the sweetener will be pushed higher through the spring. The policy shift "will surely divert more cane to ethanol production, and is bullish to sugar," said Chris Narayanan, an analyst at Société Générale in New York.

Ethanol is currently about two-thirds of the price of gasoline in São Paulo, the most populous state in No. 1 sugar-cane grower Brazil. That price is low enough to entice drivers to switch from the crude-based fuel; ethanol fuel is approximately 30% less efficient than gasoline, meaning drivers have to fill up more often.

Meanwhile, the U.S. Environmental Protection Agency also is stirring demand for Brazilian ethanol. The government agency on Thursday raised the amount of advanced biofuels that must be blended into the nation's gasoline by 27%, a total of 2.75 billion gallons. U.S. corn-based ethanol does not qualify as "advanced," but the Brazilian version, perceived to be cleaner burning, does -- which opens the door to more Brazilian exports.

Sugar futures have been plumbing two-year lows as the market anticipates a third straight year of oversupply and a possible record crop out of Brazil. However, analysts say the greater emphasis on ethanol should shave the projected global sugar surplus.

Michael McDougall, a senior vice president at brokerage Newedge in New York, said the increase in demand for ethanol should make 19 cents a pound a new support level in the raw-sugar market. Futures last traded at that level on Jan. 14. Raw sugar for March delivery on the ICE Futures U.S. exchange settled 0.6% higher at 18.89 cents a pound on Friday, up 2.8% on the week.

Sterling Smith, a futures specialist at Citigroup in Chicago, said the ethanol policy changes "won't create a roaring bull market" but could allow the market to move about three cents, or 14%, higher over the next few weeks. The market last traded at those levels -- more than 21 cents a pound -- in October.

A key indicator will come in May. That's when Brazilian sugar mills start reporting the percentage of ethanol they are producing versus the percentage of sugar. The mills can create either product from sugar cane. Last year, the mills reported that 49.6% of the cane crushed in the key Center-South growing region went to sugar, while 50.4% went to ethanol.

Fain Shaffer, president of brokerage Infinity Trading in Medford, Ore., says the huge sugar inventories that people are expecting "could evaporate pretty quickly" if Brazil shifts more cane to ethanol. "We like this market."